Fed May Soften Tone From June
Increasing Virus Cases May Give Fed Pause
The Fed concludes it’s two-day meeting this afternoon and investors will be looking for a couple things. For one, we think the Fed may well strike a different tone given they have been consistent in their messaging that the direction of public health (i.e., virus cases) will be a key factor in driving economic growth as we try and emerge fully from the pandemic. The confident tones about strong economic growth in June may be a little more tempered at today’s meeting, and while there will be no update to the dot plots at this meeting, reversing some of the newfound hawkishness from June may signal to investors that the Fed is paying attention. While they will no doubt discuss tapering at this meeting, we’re not going to get any new information regarding the start date and tapering schedule. That will come later this year. In summary, expect no change to policy and a little softening in the confidence expressed at the June meeting. Finally, in our podcast this week we are joined once again by Joe Keating, Co-Chief Investment Officer for NBCSecurities. We discuss inflation, the COVID-19 delta variant, and the outlook for the economy. The iTunes link can be found here and the Spotify here.
Consumer Confidence Remains Strong
The Conference Board’s consumer confidence reading increased 0.2 points in July to 129.1. The Bloomberg consensus projected a drop to 123.8 from 128.9 prior. Assessments of the present situation improved slightly (160.3 vs. 159.6 prior) while expectations stayed almost unchanged, down 0.1 point (108.4 vs. 108.5 prior). Consumers gauged jobs as slightly more plentiful in July, indicating that the labor market recovery is on course to strengthen heading into the fall. Importantly, Inflation expectations eased slightly while buying plans six months hence improved. A larger percentage of consumers plan to purchase homes, automobiles, and major appliances in the coming months.
The Conference Board’s consumer confidence gauge has help up better than the University of Michigan measure of sentiment. The Conference Board tends to depict moods related to the job market, incomes and business conditions, while the Michigan survey assesses attitudes via a wider scope of questions on prices, finances, buying conditions and inflation expectations. Consumers’ short-term outlook in today’s measure remained relatively upbeat. Consumers continued to expect improvement in business conditions, jobs, and personal financial prospects. This is in line with our expectations for a sturdy advance in demand as spending continues to gradually rotate to services.
House Price Gains Approach Highs from Housing Bubble
The S&P CoreLogic Case-Shiller National Home Price index rose 16.61% year-over-year in May after rising 14.84% in the prior
month, and is the biggest gain in the index that has data going back to 1988. The S&P/Case-Shiller 20-city NSA index posted a gain of 16.99% which is the largest gain since August 2004 during the height of the housing bubble.
The gains were broad-based but western cities continued to garner the highest rates of appreciation led by Phoenix (25.86%), San Diego (24.66%) and Seattle (23.43%). In addition, as was the case in April, five cities in May saw their all-time highest 12-month gains. Those cities were Charlotte (16.93%), Cleveland (13.61%), Dallas (18.49%), Denver (17.41%) and Seattle (23.43%). For those that lived through the housing bubble more than a decade ago, and I presume that is most of us, thoughts of plunging prices following the upswing can’t help but come to mind. This time, however, the Fed is not likely to step on the appreciation as there have not been the same types of egregious lending and underwriting that led to many of the banking collapses in that prior period. Still, galloping prices eventually will slow activity as marginal buyers are priced out of the market. So far, however, that isn’t happening.
Agency Indications — FNMA / FHLMC Callable Rates
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